What is Futures Trading? What are Risks in Futures Trading?

2019/05/29

The good news is that there is huge money in futures contract trading. The bad news is that only a minuscule percentage of investors actually manage to do it successfully and consistently. So what is Futures trading?

It is the trading done by speculating on the direction the price of the commodity that you are trading will take in the future. Unlike trading in share market, in futures trading you do not own anything. You are merely laying your bets on what you think will be the future price of a commodity.

The reputation of  futures trading as a high risk instrument is the reason why it is not as popular as the stock and shares market. However, with the right amount of discipline and exhaustive research, one can easily make potfuls of money in this market.

Futures trading is not limited to commodities alone. Trading is also done in currencies, interest rate futures on bonds and securities, oil and gas prices and any other fast moving commodity under the sun like sugar, coffee and tea.Precious metal are perhaps the most traded items on the futures trading markets. The market has producers and consumers who look to minimize their risks from future price fluctuations.

The liquidity in the futures markets are provided by the speculators, who do not actually deal in commodities, physically. There is a fine tact in minimizing risks in futures trading. Before the date of the future delivery, the speculator offsets his position, without taking or making delivery. If the price has moved in the direction predicted, the trader makes profit, else he ends in a loss. Timing of exit is of prime importance. Eschew greed and you have made it as a futures trader.

Choosing the right markets is also equally important. Markets with adequate liquidity for speculation are safe bets. Additionally, diversification while trading in futures markets is a huge plus point. Every market peaks at some point in time during the year. By diversifying into different markets, the chances of catching those  market peaks improve dramatically. Also, losses from one market can be offset by gaining profit in some other commodity.

The best way to enter a futures trading market is to first identify the markets, develop a trading plan and put them to work after adequate testing. Patience is the operative word for those who want to make a killing in the futures trading market.

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